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Is the market price your default price?

Patrick Patton for Progressive Dairyman Published on 24 November 2017
Marketing can seem overwhelming

Remember your driver’s license application? On it, there’s a question related to becoming an organ donor upon death. Based on your experience, what percent of people do you think choose to be a donor?

Researchers say the way in which this question is presented has a significant influence on how many people choose to donate. Furthermore, what they discovered has implications for how much control people actually have over their own decisions.

After all, if a person’s answer to organ donation can be influenced, you have to wonder about other decisions in life and business, like farm marketing.

The decision-influence research centers on a fascinating difference in donor-agreement rates among people who filled out forms at driver’s license facilities in European countries that are culturally similar. For instance, commitments to donate reached 100 percent in Austria but only 12 percent in Germany. In Sweden, 86 percent of applicants agreed to become donors upon death but, in Denmark, only 4 percent. Belgium’s rate was 98 percent while the Netherlands’ was only 28 percent.

It turns out license applicants in these countries were presented the donor question in two different ways. In countries where agreement rates were low, applicants were given this opt-in statement: Check this box if you want to participate in the organ donor program. Where rates were high, people received this opt-out statement: Check this box if you don’t want to participate in the organ donor program.

People who see the first statement mostly do not check the box, thus they do not participate. People who see the latter statement also largely do not check the box, and they by default become participants.

According to behavioral economist Daniel Ariely, the high donor-agreement rate on opt-out forms as compared to opt-in forms is attributable to the degree of difficulty associated with the decision. The decision on both forms is the same: Would you like to donate your organs? But it’s not easy to decide whether to donate organs. People are genuinely unsure what to do. As a result, they are far more likely to accept the default position made for them.

The stark difference in these results, Ariely says, isn’t related to cultural differences, religion or how much a person cares about other people. He concludes people are not as rational as they think they are when making decisions.

The research’s connection to marketing

I thought about all of this in the context of commodity markets. When it comes to difficult marketing decisions, is it just easier to take the default?

When presented with the choice to manage price risk or take the market price, farmers often choose the latter. In our own past observations of marketing participation over a three-year period between 2007 and 2009, we estimated about 5 percent of dairy farmers marketed consistently.

The remaining 95 percent either marketed occasionally or always took the market price. These percentages don’t seem to have changed materially over the years.

Why do farmers take the market price? Everyone has their own reasons. In our experience, farmers lack time, knowledge or discipline for consistent marketing. They don’t understand it and therefore feel it’s too risky. They’ve had a bad past experience. Or there’s a feeling marketing takes control away from them.

All of these reasons boil down to one factor: Marketing is difficult. It involves a series of ongoing, tough decisions amid a backdrop of unpredictability. The degree of difficulty, I believe, is what drives many farmers to choose the market price.

Some will say taking the market price nets out the same as marketing over the long term, and that is why they do it. However, consistently applied and disciplined marketing strategies, when fully committed to by the farmer, can reap dividends over accepting the market price.

Additionally, taking the market price and settling for average in a volatile market can be costlier than it seems:

  • You need to set a cost structure to endure market lows. As a result, it becomes difficult to pull the trigger on business decisions that add cost, and your growth potential becomes limited.

  • It becomes imperative to save aggressively during good times to help endure bad times, eroding your confidence to invest in your business.

  • You expose yourself to the full volatility of the market. Saving won’t protect your operation from the full extent of downside risk.

Could it actually be true accepting the market price is a choice made by default simply because the other option – consistent marketing – is too difficult to think through?

Perhaps the best way to answer that is to ponder why a single invitation to become an organ donor – posed in two different ways – results in dramatically different outcomes.

If marketing for you is fear of the unknown, there is a way forward that can help put your farm on more stable financial ground. Become a marketing expert or hire an expert you can trust.  end mark

Futures trading is not for everyone. The risk of loss in trading is substantial. Therefore carefully consider whether such trading is suitable for you in light of your financial condition. There are no guarantees that using strategies, consistency or discipline will translate into successful marketing.

Patrick Patton
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